The Motor Court Company
Well-known member
North Korean invasion.
sorry cannot help it after I watched Red Dawn last night
sorry cannot help it after I watched Red Dawn last night
irvinehomeowner said:
What the bubble?!?
- Thread starter irvinehomeowner
- Start date
paperboyNC said:
How can you say interest rates, investors are pretty irrelevant??? Yes, employment is very important, but what caused the crash in 2007 through 2009?? We had a very low unemployment rate, job market was strong, wage was increasing, people's net worth was high, things were happy bubble happy happy back then. Our lovely wizard Greenspan lowered the interest rate and kept it too low for too long, which pumped and inflated the money supply with easy financing, etc. => Increase in Leverage => money flooded into real estate, exotic securities (CDOs, MBS, CDS, etc.) and leveraged buyouts ==> which caused bubble and crazy debt bubble. So government's role and manipulation does play a key role in addition to employment. If it was perfectly and efficient market without gov't intervention, yes employment will play a key role. However, we are not in an perfectly efficient market. Tech bubble --> Real estate bubble --> Government bubble (last frontier bubble). When bond market bubble pops when it has been inflating and bubbling up for the past 30 years, it is gonna be VERY UGLY. Worst then the housing bubble pop.
It's the government policies that dictate how we react. Investment Bankers were simply taking advantage of what the government has open up them to do = Lower regulations. Thus, we can't solely blame on them for the crash either.
House prices became inflated because of 30 years of declining interest rates and high debt load. It's similar to expanding P/E ratio in the stock market because more people are invested although the fundamentals are the same.
I agree with you that Irvine will weather the storm better then other places because of stronger employment, etc. but things are not that simple - perhaps in perfectly efficient market it is.
gld2 said:
This is just WORST case scenario so don't panic
But, it can happen if it happens "suddenly" not in an orderly manner.If the bond crash happens gradually, then people/investors can react to it so not as bad. However, IF the bond market goes out of control and goes into a shock, it will be ARMAGEDDON for all. Do you know how much of our global wealth is in Treasuries and related fixed income instruments?? Enormous (close to $100 trillion globally and perhaps around $40 trillion for US as of today) and we have been piling it up for 70 years since the end of WWII. Your pension and savings will be wiped out, inflation and interest rate will skyrocket, etc. All assets will be affected perhaps lesser so for hard assets (agriculture, commodity, gold, etc.) I won't go into too much details.
Your employer, our government (local, municipal, federal), your schools, our parent's savings, homes, roads, pensions, corporations will all be adversely affected. What do you think your mello roos are? They issued bonds (borrowed) to pay for those infrastructure. They will all take a hit. Corporations issue bonds to fund investments and grow. PE/VC funds borrow to acquire companies. Government (Sallie Mae) borrow to provide student loans to educate the students. Banks and Insurance companies hold enormous amount of securities in treasuries, MBS, and other types of fixed income securities as part of their asset. If they go sour, many will be insolvent as it will wipe out their equity.
Think about what would happen if you, corporations, governments are unable to borrow to purchase, invest, repair, etc. and at the same time your savings will be wiped out.
U.S bond market (just fixed income) will take 20% to 30% loss = $10 trillion loss in the U.S. and $20 to $30 trillion loss globally. On top of those losses, the Equity market will go into panic and crash, real estate asset will take a dive because you have no access to credit and the huge derivative market will go into a tail spin. Huge losses.
Who owns U.S. treasuries (debt)? The Chinese and Japanese do. This is their savings/assets and it will be wiped out as well, which will hurt their fiscal soundness. No one can escape. Just look at Greek and Cyprus as one of the examples. But, they are tiny little drop in the bucket compared to U.S. fixed income market. So multiply Greek and Cyprus x 10,000. Also, look at Japan. They got clobbered on their debt load in early 1990s. The real estate price hasn't recovered to that level even after 20 years and the after math still lingers.
One good thing out of this = U.S. probably won't need to pay back China on those debt. We start from scratch clean. Deleveraging is very painful and slow process.
Ofcourse, this is the worst case scenario so don't panic.
http://www.caseyresearch.com/articles/coming-crash-bond-markethttp://www.arabianmoney.net/us-doll...-us-bond-market-crash-play-out-for-investors/
SEC Gallagher - Muni Bomb -http://video.cnbc.com/gallery/?video=3000162410http://moneymorning.com/2013/05/03/bond-market-crash-will-strike-by-2016-expert-predicts/
2008 Financial crisis is " corporations, governments are unable to borrow to purchase, invest, repair, etc. and at the same time your savings will be wiped out. "
Is the Bond crisis same? If the bond crisis won't happen, When the rates go up, the bond prices go down. As everyone predicated now, the bone prices go down as the rates are up. What will happen to the housing price? because inflation is up, therefore the rate goes up, then the housing price should be up as inflation is up. However the rate goes up, which will negatively impact the housing price. the up and down pressures will offset each other? what is going to happen?
Is the Bond crisis same? If the bond crisis won't happen, When the rates go up, the bond prices go down. As everyone predicated now, the bone prices go down as the rates are up. What will happen to the housing price? because inflation is up, therefore the rate goes up, then the housing price should be up as inflation is up. However the rate goes up, which will negatively impact the housing price. the up and down pressures will offset each other? what is going to happen?
gld2 said:
Yes the bond (IOU/Debt) crisis is the same. Right now bond are overpriced, which means interest rates are lower then what it should be because of Fed manipulation. Fed is pumping out liquidity and providing money by purchasing bonds. Right now, people that CAN NOT afford to purchase homes are able to purchase because of these manipulated rates ==> Artificially high driven demand for homes then it really should be because of access to free $$$ and free financing. The real interest rate (treasury 2% - inflation 2% = free) is actually lower so it's awesome to get free money from the gov't.
If interest rate goes up and bond prices tank ==> Less people can afford to buy homes. Students and graduates will have a tough time paying interest on their student loans (btw, student loans doesn't go away eventhough you file Bankruptcy). FYI, Medical students have average $250,000 in debt.
bond crisis ==> Not only people, but corporations and governments can't obtain financing to invest, grow, hire, build, etc. ==> Economy will come to a halt. Corporations, consumers, even our government will have to spend more of their discretionary income on interest expenses.
$50 trillion debt x 2% interest = $1 trillion interest expenses = Currently manageable
$50 trillion debt x 10% interest = $5 trillion interest expenses => less money available to spend on other things. Just FYI, our total annual tax revenue is about $3 trillion so if interest rates goes out of control, U.S. is going to default.
There will significant illiquidity in the market place and the financial system will come to a halt. This will be Global collapse because every other countries and financial institutions and corporations own U.S. treasuries and bonds. We are cross collateralized/linked in some way. It will wipe out their assets. No more FCBs because Chinese own trillions of U.S. treasuries and we can't pay their interest and pay back their principals (probably at 20 cents on a dollar maybe). Chinese real estate bubble will pop too. Actually, this might happen before as their bond (Debt) bubble is growing too.
No $$$ to invest, hire, etc. ==> Hire employment. Governments, retirees, 401k, pensions, banks, credit unions, corporations all own bonds as part of their investment/asset. Their savings will be chopped up. People will move back into their parent's homes again.
Overall, less people can afford to purchase homes because of higher interest rates and very limited access to credit. Unemployment rate will shoot up, which means less demand. Foreclosures will follow. ARMs will reset at significantly higher rates, which means more foreclosures.
U.S. is the consumption power house of the world. We borrow from Chinese and others to buy our lovely Mc Mansions, BMW, Mercedes, Toyota. So if bond crisis spread to the economy, it will put a halt on our consumption and demand for Chinese, German, Japanese goods.
Low demand, no access to financing, and high unemployment ==> lower housing prices.
Just think this way = Complete bond collapse = 2008 financial crisis x 10
jamboreedude
New member
Maybe there will never be a bursting of the bond market because Uncle Ben can print money to infinity in order to soak up any unwanted bonds thereby reducing or stabilizing interest rates. If U-Ben didn't have the printing presses then I am sure the bond market will burst someday. Is this logical?
jamboreedude said:
This will be logical upto a certain point (a threshold point). Can't say when we will reach that threshold level, but if you keep on printing money and flow that $$ into the economy, US$ supply will get bigger and bigger up to the point when the world say enough is enough and dump all their US dollar denominated asset into the market thereby crashing the value of US dollars ==> TRASH = inflation ==> higher interest rates. At end of the day it's supply and demand. You flood with infinite amount of US dollar into the global money supply, it will eventually become your next toilet paper. Google Currency War I and II. German Deutche Mark was trashed after they were printing money like nuts after their WII loss. Inflation 1000% and made their money worth crap.
Fed printing USD into Infinite ==> Breaks threshold point and the USD will become TRASH. People will switch to hard assets and other safe haven assets to replace USD==> Gold, Silver, Oil, whatever. For now, there is no alternative because every other major currency is in similar state except Yuen.
This will collapse the U.S. treasuries. But, it will be good because we don't need to pay back Chinese for every $1 of debt because $1 of debt today will be worth $0.10. This will be painful, but it will give us a clean start.
But, this scenario would be a low probability. It happened during the Currency War I which caused Great Depression in the 30s and Currency War II in the 70s, when we saw the collapse of U.S. dollar and US denominated assets (because US gov't broke the link between USD and gold), which caused high inflation (hyper inflation) and interest rate spike.
Zimbawe hyperinflation in 2008 was 89,700,000,000,000,000,000,000% in less than a year, which means your $1 million will be probably like a $0.01 in a year :-\
http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
But, no worries we are not Zimbabwe.
Irvinecommuter
New member
Goriot said:
Also, inflation and money printing is relative to other country. The rest of the world is printing money as well so inflation will pretty much stay in check.
Irvinecommuter said:
Usually, Money printing competition might looks like its working initially, but history tell us that it ALL turned up being bad and nasty at the END. Who knows when that will happen=). It's all about timing. I think "Currency War" was a good book to read. I recommend.
btw, Japanese Abenomics prototype printing machines are printing at 3 times (relative to GDP) the speed of our finest printing press 2.0 Bernanke. Let's see how they end up in the next 5-10 years.
It will be interesting...
ZeroLot
New member
Goriot said:
Thanks, I will check out "Currency War".
Here's my 2 cents. It's nice to look at history but history has NOTHING on our current global economy. The current technology of internet, ease of global travel and business, etc have completely changed the playing field.
No matter who can print money faster, it all comes down to the US economy keeping the entire world afloat. Any blip in the dollar, has a exponential effect in the world. If the sh*t ever seriously hits the fan, gold, silver, diamonds, etc won't matter anymore. When Europe was the world leader (pre-WWII) the bling didn't matter. It was all about food, cigars, and alcohol (maybe coffee too) ... and connections. Which led to instability in Europe and eventually WWII.
So as long as the rest of the world believes the US has money, then it does. It doesn't matter what the printing presses do. We have a better chance of surviving a BIG natural disaster than a complete loss of faith in the US economy.
paperboyNC
New member
Goriot said:
Your logic is very flawed. Hyperinflation would shrink the size of all debt so no one would have to pay ridiculous interest rates on any debt. it's the people that hold that debt or hold cash that take a loss. It basically transfers wealth from the savers to the borrowers unless the savers invested in hard-assets such as housing, stocks, etc (though even those would take a hit if there was economic uncertainty).
The actual interest rates DO NOT MATTER. The real interest rate is the interest rate minus inflation. So if interest rates go up to 12% but inflation goes up to 10% you still only paying 2% in real interest.
paperboyNC
New member
Goriot said:
I'm talking about the long-run. You'll have short-term fluctuations based on government manipulation, interest rates, etc. In the long-run housing pricing will be based on supply/demand of land plus the cost to build a home on that land. The cost to build a home will increase with inflation. The value of land will go up with population growth / job prospects in a given area as well as an increase in household income.
paperboyNC said:
So which part are you saying it's "VERY" flawed? I think if you read my prior post, it says inflation will reduce the size of debt quote - "But, it will be good because we don't need to pay back Chinese for every $1 of debt because $1 of debt today will be worth $0.10[/b]."
The interest rate is on your notional principal not the discounted amount. Yes, it's the real interest rate, I agree with you and I have mentioned that. There are two ways to get out of this massive debt. You inflate out by devaluing the USD thereby reducing the debt denominated in USD or through economic growth and deleveraging naturally. So where is it flawed?
paperboyNC said:
In the long-run = Yes. I agree with you. Demographic changes and job growth are the key. Good example would be perhaps Japanese Real Estate. They got hammered by debt and real estate bubble crisis in early 1990s. ON TOP of that, their population is shrinking with aging population and low birth rate.
So unfavorable demographic shift = bad for real estate. That's why Japanese real estate prices are the same for the past 25 years.
paperboyNC
New member
Goriot said:
Everyone agrees that interest rates are going to gradually increase and bond prices will fall in the short-term in price and in the long-term in real term (a 30 year bond will not fall in price just prior to redemption since you still redeem it for full value). What you are doing is making it seem like rising interest rates are going to be catastrophic. We actually want higher interest rates and higher inflation. The reason the FED has made the rates so low was to prevent deflation and to switch to inflation. 3-4% annual inflation would be a wonderful thing right now.